Spain Is Not Out of the Woods Yet

MADRID — Officials from Washington to Frankfurt have recently declared that the worst is over for the euro zone.

But here in Spain, worrisome signs abound.

On paper, Spain seems far from needing a Greece-style bailout: its debt, though climbing, is half the level of the Greek government’s. And Spanish banks, helped by cheap and bountiful cash from the European Central Bank’s loan program, continue to lend Madrid the money it needs to get by.

But experts warn that an alarming combination of escalating fiscal austerity and a worsening real estate bust threatens to set off a vicious economic circle in Spain like the one that brought Athens to its knees.

“The math does not work,” said Jonathan Tepper, the founder of Variant Perception, a research firm in London. “Spain will eventually need a rescue of some kind.”

With businesses struggling to survive, the country is entering its second recession since the start of the global financial crisis in 2008. About 5.3 million people are unemployed — nearly a quarter of the work force — while half of the country’s eligible young people cannot find work.

Bond investors are growing increasingly doubtful that Spain’s new conservative government can work out its problems without help. They have become aggressive sellers of Spanish government securities and numerous hedge funds are betting against the country’s troubled banks by shorting their shares.

Since the beginning of the month, the country’s 10-year bond yield, the best real-time gauge of how private investors view Spain’s prospects, have jumped to 5.4 percent, from 4.9 percent at the end of February. By contrast, bonds of Italy, which has been viewed as another potential trouble spot, have remained roughly stable.

And in Brussels, even though the official position is that the euro crisis has passed, some European Commission policy makers are said to be privately voicing concerns about Spain’s ability to generate the growth needed to manage its debts and create jobs.

“The idea that the L.T.R.O. and the Greek deal have lifted Europe out of crisis mode and set the stage for expansion is nonsense,” said Richard Portes, an expert on European financial policy at the London Business School. The L.T.R.O., for long-term refinancing operations, is the name of the European Central Bank’s program of cheap loans for banks.

Holding Spain’s economy back has been the urgent need for Spanish companies, banks and individuals to focus on paying down debt. While public debt is relatively modest, private debt has soared to 227 percent of gross domestic product, according to official statistics. That is among the highest levels in Europe.

And even though banks are awash in cash because of the European Central Bank’s generosity, overall loans to Spanish businesses and individuals shrank 4 percent in January, the sharpest monthly fall in more than two years.

The prime minister, Mariano Rajoy, will present the government’s 2012 budget next week, based on a forecast that the economy will contract 1.7 percent this year. He has already declared that Spain cannot meet the original deficit target set in consultation with the European Commission — 4.4 percent of G.D.P. — and will aim for 5.3 percent instead.

But even those predictions look optimistic. Citigroup forecasts that Spain’s economy will contract 2.7 percent in 2012, trailing only Portugal and Greece in the euro zone. The bank predicts that 2013 will not be much better, with the economy falling an additional 1.2 percent.

“We are approaching 25 percent unemployment,” said Santiago Carbó Valverde, a financial consultant and professor of economics at the University of Granada. “If you put hard medicine on a weak body, this is what happens.”

The social strains, formerly eased by cash generated in the underground economy and the cushion of support provided by extended families, are beginning to show. In Spain, 1.6 million households ended last year without a single member holding an official job. That is requiring people like Dionisio Santamaría, a laid-off building services worker, to visit a religious charity here in central Madrid every month to pick up more than 60 pounds of pasta, sugar, biscuits and other basic items to help feed his wife and two young children.

Through part-time work, he estimated, the couple earns about 600 euros ($795) a month, most of which goes to pay the rent on their apartment in Ciudad Lineal, a Madrid suburb. He sees no light at the end of the tunnel. “I’ve got zero expectations of finding a real and normal job,” he said.

For the moment, the European Central Bank is keeping Spanish banks on life support and helping to ease the strain on Madrid. Since the central bank started offering cut-rate three-year loans to troubled European banks in December, Spanish financial institutions have been among the most enthusiastic recipients. They have borrowed about $200 billion from the bank at 1 percent interest. Of that sum, about a third has been used to buy Spanish government debt at considerably higher rates, increasing bank profits.

“They are using the banks to artificially fix the sovereign,” said Iñigo Vega, a Spanish banking analyst at Crédit Agricole Cheuvreux, referring to the Spanish government. “The banks are doing this to be patriotic and because they have nothing to lose. But what happens in the second half of this year when the E.C.B. stops lending at low rates?”

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And with the Spanish economy heading back into recession, the banks are reluctant to lend to riskier borrowers. This last week, Spain’s central bank said nonperforming loans had reached 7.9 percent. Mr. Vega says the real figure may be twice that level.

Meanwhile, the housing market remains in free fall; in the fourth quarter of 2011, home prices sank 11.2 percent from a year earlier.

The credit squeeze on ordinary borrowers, meanwhile, is bad news for business owners like Jesús Gabino, who runs a building services company in Toledo.

As the housing market collapsed, Mr. Gabino said, the savings bank he relied on slashed his credit line to 15,000 euros, from 130,000 euros previously, contributing to his painful decision to lay off 25 of the 30 workers he had employed before the financial crisis hit.

“We’re obviously active in the sector that is worst hit by the crisis, but the banks have made sure that we’ve been sinking a lot faster,” Mr. Gabino said.

“The banks are borrowing every cent they possibly can from the European Central Bank,” he added, “without making any money available to longstanding clients like us.”

A version of this article appears in print on March 24, 2012, on Page B1 of the New York edition with the headline: Spain Is Not Greece, but Doubts Emerge About Its Prospects for Reviving Growth. Order Reprints|Today's Paper|Subscribe